Letter 47: Bank Owned
Life Insurance
The Division of Banking (“Division”) has received inquiries
from Wisconsin state banks regarding their ability to purchase corporate
or bank owned life insurance policies (“BOLI”) insuring their
employees' lives. Generally, BOLI is purchased to help fund future financial
obligations under a bank’s employee retirement and benefit plans.
The purpose of this Interpretive Letter is to outline the Division's position
regarding a state bank's decision to purchase BOLI and to set forth guidelines
addressing the due diligence considerations that should be undertaken
by a bank and its board of directors when deciding to purchase this insurance.
Wisconsin state banks have been permitted to purchase and hold life insurance
for a legitimate need of the bank and similarly are permitted to purchase
BOLI on the lives of a group of bank employees. Such a purchase, to enable
a bank to fund its future obligations to employees and retirees, addresses
a legitimate need of the bank for insurance.
Because of the complexity of many of the BOLI policies and group programs,
and the fact that life insurance is a form of long term financial commitment
with various components of risk, banks and their boards of directors should
take appropriate steps to assure they are making informed decisions about
purchasing this insurance, consistent with safety and soundness principles.
Risks to be analyzed which are associated with BOLI include transaction,
credit, interest rate, liquidity, compliance, and price risks. These risks
are discussed in detail in the Interagency Statement on the Purchase
and Risk Management of Life Insurance (“Interagency Statement”)
dated December 7, 2004.
The Division believes these due diligence and safety and soundness considerations
have been adequately and appropriately addressed by the Interagency Statement.
It is the position of the Division that state banks considering any BOLI
purchase should also address and satisfy each of the due diligence considerations
set forth in the Interagency Statement. The Division notes that the Interagency
Statement requires banks not only to make and document an appropriate
pre-purchase BOLI review and analysis, but also to conduct appropriate
post-purchase reviews of the life insurance. The reviews should include
monitoring for compliance with the investment limits of Section 221.0320,
Wis. Stats.
The cash surrender values of general account life insurance policies represent
the unsecured obligations of the insurance companies, therefore the carrying
values of the cash surrender values in each company is limited to the
investment limits of Section 221.0320, Wis. Stats.
With respect to the purchase of a separate account BOLI policy, the underlying
investments within the separate account must be bank eligible investments
under Chapter 221, Wis. Stats. Furthermore, the underlying investments
of the separate account will govern the applicable investment limitation
for the separate account under Chapter 221, Wis. Stats. For example, a
separate account BOLI policy containing equity investments would not be
considered a bank eligible investment under the banking statutes. Additionally,
a bank’s initial investment and subsequent carrying value in a separate
account BOLI policy containing corporate debt obligations would be limited
to the amount under the statutes for a bank’s direct investment
in a corporate debt obligation.
Bkg. Ltr. #47, December 20, 2001, Michael J. Mach, Administrator
Amended, May 15, 2006, Michael J. Mach, Administrator
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